Lunn Poly Ltd & Anor v Liverpool & Lancashire Properties Ltd & Anor

LORD JUSTICE NEUBERGER: This is an appeal from His Honour Judge Norris QC, sitting in the Birmingham District Registry as a Deputy High Court Judge. The appeal raises three issues, although the third is now agreed. The issues are:

Liverpool & Lancashire Properties Limited were the freeholders of a shopping centre, Ellesmere Centre, Walkden, Greater Manchester (“the centre”) until 21 March 2005, when they transferred their interest to an associated company, Derwent Holdings Limited. There is no need to differentiate between these two defendant companies for present purposes, and I shall call them “the landlords”. Unit 28 in the centre is subject to a lease granted in 1993 for a term of 25 years subject to 5-yearly rent reviews. The lease was vested in Lunn Poly Limited until it was assigned to a company in the same group. Both companies are included in the expression “the tenant”.

The lease contained the sort of provisions one would expect to see in a lease granted some 12 years ago of a unit in a shopping centre. Those provisions included:

By 2002 the centre was run down, and the landlords developed proposals to improve it. Those proposals involved substantial works to the structure and common parts of the centre. At the end of July 2003 the landlords gave the tenant notice of the intended works, which included plans. Those plans clearly show that they included blocking up an existing fire door, which the tenant not merely had the right to use under the lease, but which was included in the demise. The plans also clearly involved the construction of a new fire door in a different location. The notice envisaged the works involved being carried out by the tenant, pursuant to the fire officer’s requirements.

The landlords’ works to the centre started in early September 2003. By January 2004 the works had got close to the unit. In late February 2004, the landlords wrote to the tenant stating that the relocation of the fire door should be very shortly undertaken by the tenant. The tenant responded by denying it had agreed relocation of the fire door, let alone at its expense. Discussions ensued during the first half of March. Those discussions did not reach agreement, but they proceeded on the basis that the existing fire door would be relocated. When the landlords wrote seeking to finalise agreement, the tenant replied indicating that it wanted “a suitable financial incentive”. This demand, according to the judge, “irritated the [landlords] and led to the parties indulging in increasingly intemperate correspondence and increasingly unreasonable behaviour”.

Even this correspondence proceeded on the assumption that the existing fire door would be relocated. The substantial issue between the parties was about terms. The pressure was on the landlords, as the tenant’s refusal to agree relocation of the fire door, until terms had been agreed, was apparently costing the landlords about £45,000 per month due to the consequent delay in completing the works to the centre.

At 6 o’clock in the morning of 22 October 2004, having warned the tenant of their intention to do so, two weeks, and then again one week, earlier, the landlords bricked up the existing fire door. Later the same day the tenant applied without notice for, and obtained, an interlocutory injunction from HHJ McKenna entitling it to reinstate the existing fire door and restraining the landlords from interfering with it. That injunction was continued by HHJ Taylor on 29 October. The injunction was obtained and continued on the basis of procedural irregularities and pursuant to material non-disclosure, most notably the failure to reveal that the tenant had no assets and that it was in breach of covenant. However, on the return date of the interlocutory injunction on 4 November 2004, Judge Norris QC continued the injunction, despite the irregularities and non-disclosure, on the basis that the non-disclosure, although intentional, was a result of a misjudgement as opposed to a deliberate intention to mislead, and that it had not harmed the landlords.

At the hearing on 4 November, the judge ordered a speedy trial which took place over a period of three days a week later. Apart from the tenant’s claim for an injunction requiring the landlords to reinstate the existing fire door and not to interfere with it, the judge also had two claims relating to the landlords’ forfeiture of the lease. This forfeiture arose from a notice served by the landlords as recently as 3 November 2004 pursuant to s 146 of Law of Property Act 1925. In that notice, the landlords contended that the tenant was in breach of covenant in that it had parted with possession and/or occupation of the unit to an associated company (as was indeed the case, and had been the case for some time). That company was the eventual assignee of the lease.

On 8 November, the tenant issued proceedings seeking a determination that the landlords had waived the right to forfeit the lease, or, if there had been no such waiver, seeking relief from forfeiture. On the following day the landlords issued proceedings seeking possession of the unit.

After the three day hearing, the judge gave a full and careful reserved judgment on all the claims on 22 December 2004. He decided that the breach of covenant alleged in the section 146 notice was made out, that the landlords had not waived the right to forfeit and were consequently entitled to an order for possession, but that the tenant should be accorded relief from forfeiture on terms that the it paid the costs of the section 146 notice and executed any document needed to regularise the position with regard to the breach.

On the tenant’s claim for an injunction, the judge held that the landlords were not entitled to block up, or require the blocking up of, the existing fire door. Consequently he held that, by bricking up the existing fire door on 22 October 2004, the landlords were in breach of their covenant for quiet enjoyment. However, in his discretion, he refused the tenant an injunction, concluding that it was an appropriate case for damages in lieu of an injunction under Lord Cairns’s Act (i.e. the Chancery Amendment Act 1858, hereinafter “the Act”, although such damages are actually now provided for by section 50 of the Supreme Court Act 1981). The judge ordered the tenant to pay the costs of the October hearings on an indemnity basis, and of the waiver, forfeiture and relief proceedings on the standard basis.

The judge’s reasons, as set out in his judgment, for refusing a permanent injunction as sought by the tenant, were as follows:

No point is taken by the tenant on the judge’s decision not to grant an injunction – quite rightly, in my view. The judge reserved certain issues for further argument, which he heard and then resolved in a judgment handed down on 10 June 2005. The first issue determined in his judgment of that date involved the way in which damages pursuant to the Act were to be assessed. He agreed that such damages should be fixed at a figure which would be arrived at as a result of hypothetical negotiations between willing parties in the position of the landlords and the tenant for the “sale” of the tenant’s right to prevent the landlords blocking up the existing fire door and relocating it.

The first question raised on this appeal by the landlords is not whether the judge was right to award damages on such a negotiating, as opposed to the more familiar and traditionally compensatory, basis. It is a much narrower point, namely, whether the judge was right to conclude that, in the hypothetical negotiations, the parties should not be assumed to take into account the fact that the tenant was at risk of losing his lease altogether as a result of forfeiture proceedings based on the breach of covenant, which had occurred by 22 October 2004, the date when the landlords had bricked up the existing fire door.

I am bound to say that, even if the landlords were correct on this issue, it appears to me to be a very weak point in practice. Letting a company in the same group as the tenant operate the business from the unit, while undoubtedly a breach of covenant justifying a forfeiture, was one which any lawyer with even only a modicum of experience and knowledge of the relevant law and practice would have firmly advised would not disentitle the tenant from obtaining relief from forfeiture. This is especially clear in light of two cases rightly relied on by the judge, when he said that there was “no doubt in [his] mind that relief should be granted in this case”, namely, Southern Depot Co Ltd v British Rail [1990] 2 EGLR 39 and Ropemaker Properties Ltd v Noonhaven Ltd [1989] 2 EGLR 50.

However, the point is before us, and must be considered, and, as has been said in argument, it may well be a point of some significance more generally. The landlords’ argument, as advanced by Mr. Bartley-Jones QC, is simple. It is this. The sum payable under the Act is to be assessed, and therefore the hypothetical negotiations are assumed to take place, at the date that the wrong (ie the bricking up of the existing fire door) occurred, and one therefore must assume that the circumstances which actually prevailed at that date were indeed in existence. Accordingly, as there was, as at 22 October, a breach of covenant giving rise to the possibility of a forfeiture claim, that can and should be taken into account when considering the hypothetical negotiations as at that date.

The first question is whether it is right to proceed on the assumption that the hypothetical negotiations take place at the date of breach. In that connection, it seems to me that both authority and principle do indeed suggest that, in a case where an injunction to enforce a contractual term is refused on the basis that the claimant should be satisfied by an award of damages under the Act, the normal date on which such damages should be assessed is the date of breach - see paragraph 18-18 of Snell’s Equity (31^st Edition).

I am prepared to assume, in the landlords’ favour, that the date by reference to which damages under the Act should be assessed in the present case is indeed 22 October 2004, when the breach can be said to have occurred, because that was a date on which the existing fire door was blocked up by the landlords. However, it is only fair to say that the assumption may not be correct. There is only a presumption that damages under the Act will be assessed as at the date of the breach, and that is a presumption which will sometimes not be applied, in the same way as a similar presumption is often not applied in cases where common law damages for breach of contract are to be assessed.

There is no doubt that, where one is required by a contract or a statute to assess damages by reference to what hypothetical willing parties might agree as at a certain date, which is really a way of defining market value, one has to take circumstances as they are as at the date of valuation. In such a case, it would be illegitimate to take into account events which occurred after the valuation date, because, ex-hypothesi, such events could not affect the minds of the hypothetical parties or the state of the market as at the valuation date. (It should be emphasised that this does not mean that actual transactions which occurred after the valuation date cannot be taken into account as comparables: that is a quite different matter).

Accordingly, on the face of it at least, there is considerable force in the landlords’ point: as at what one might call the valuation date in the present case, the lease was liable to be subjected to forfeiture proceedings which appeared to be well founded, albeit that the tenant could apply for relief from forfeiture with a very good chance of success.

However, as I see it, this argument overlooks the point that one is not here concerned with a strict contractually-based or statutorily-based market value assessment (as, for instance, under most rent review clauses or when assessing compensation for compulsory purchase). Damages under the Act are, of course, quasi-equitable in nature: they are awarded in lieu of equitable relief albeit that their direct origin is statutory. Nonetheless, that does not mean that damages can be assessed in any old way. The approach to assessing damages under the Act must not be arbitrary; nor should it be indefensibly consistent with the approach to assessment of damages and valuations in other fields; nor should it be unpredictable and therefore likely to lead to litigation.

The court is not limited to any specific basis for assessing damages in lieu of an injunction under the Act. However, principle and practice suggest that the normal three bases are (a) traditional compensatory damages – i.e. a sum which compensates the claimant for past present and future losses as a result of the breach but not for the loss of the covenant; (b) negotiating damages – i.e. a sum based on what reasonable people in the position of the parties would negotiate for a release of the right which has been, is being, and will be breached; and (c) an account – i.e. a sum based on an account, that is, on the profit the defendant has made, is making and will make as a result of the breach.

In relation to these three types of assessment, one would generally expect the normal approach adopted by the courts to be applied. Thus, one would normally expect that damages under (a) and (b) would be assessed at the date of breach, that any such damages would not be punitive, and that damages under (b) would be assessed by reference to facts as they were at the valuation date. For a recent example see Peter Smith J’s points 1 to 4 in WWF v World Wrestling Federation Entertainment Inc [2006] EWHC 184 at paragraph 174.

However, there are no absolute rules. Thus, as at present advised, I can see no reason why, when applying the Act, the court should not be able to order the defendant simply to pay over to the claimant a proportion of a capital sum that it made as a result of selling its interest with the benefit (as it were) of the breach of the claimant’s rights. In a sense, that could be characterised as a form of account, but it serves to emphasise that there is no absolute rule that damages in a case such as this cannot be assessed on the basis of events which arise after the breach occurs, or even after the injunction is refused.

Mr Anthony Mann QC in AMEC Development v Jury’s Hotel (UK) Ltd (2001) 82 P & CR 22 described the proper approach to negotiating damages under the Act as being:

“[11]. … to ascertain ‘such a sum of money as might reasonably have been demanded by [the claimant] from [the defendant] as a quid pro quo for [permitting the breach of covenant to perpetuate]’, to use (and adapt) the formulation of Brightman J. in Wrotham Park v. Parkside Homes [1974] 1 W.L.R. 798 at 815D. This basis of assessing damages was approved in Jaggard v. Sawyer [1995] 1 W.L.R. 269, and explained further in Attorney-General v. Blake [2000] 3 W.L.R. 625.

12.

It is also common ground that the way of ascertaining what that sum is, is to consider the sum that would have been arrived at in negotiations between the parties had each been making reasonable use of their respective bargaining positions without holding out for unreasonable amounts. This requires, in turn, that the parties have regard to the cost or detriment to the claimant and the benefits for the defendant of the latter's being allowed to [breach the covenant]. ….

13.

The negotiation analysis is not pursued rigorously to its logical end. I do not have to imagine a negotiation in which the parties have to guess at something which events have in fact made certain. In carrying out my exercise, I can take into account the actual events that have happened, and the actual benefits accrued, as at the date of the trial. In Wrotham Park, Brightman J. held that the starting point for the calculation would have been the plaintiff asking "the developer what profit he expected to make from his operations. With the benefit of foresight [sic] the developer would, in the present case, have said about £50,000, for that is the profit which Parkside concedes it made from the development" (at p. 815H). What Brightman J. seems to have been doing there is to imagine a negotiation before the infringement, but using actual profits as evidence of what the parties would have contemplated at the time (before they actually accrued). In A.-G. v Blake, Lord Nicholls expressed himself a little differently when he said (at p. 637H): "In a suitable case damages for breach of contract may be measured by the benefit gained by the wrongdoer from the breach. The defendant must make a reasonable payment in respect of the benefit he has gained." He seems to have treated Wrotham Park as an example of that; indeed, he described it as "a solitary beacon". While he does not use the concept of a hypothetical negotiation, I think that Lord Nicholls is in effect saying the same thing as Brightman J. While an imaginary negotiation is not necessarily the appropriate supposition in all cases (and not in Blake itself) I think that it is helpful. I therefore propose to consider this case on the basis of what the evidence shows about the level of gain to [the defendant] and what a reasonable negotiation would have produced based on that evidence.”

In the WWF case, at paragraph 164, Peter Smith J, after quoting from the judgment of Mance LJ in Experience Hendrix LLC v PPX Enterprises Inc [2003] EWCA 323, referred to “the flexibility of the court as to the calculation of the damages under the Wrotham principle when applied to the facts of the case.”

It is obviously unwise to try and lay down any firm general guidance as to the circumstances in which, and the degree to which, it is possible to take into account facts and events which have taken place after the date of the hypothetical negotiations, when deciding the figure at which those negotiations would arrive. Quite apart from anything else, it is almost inevitable that each case will turn on its own particular facts. Further, the point before us today was not before Brightman J or before Lord Nicholls in the cases referred to by Mr Mann.

Accordingly, although I see the force of what Mr Mann said in paragraph 13 of his judgment, it should not in my opinion be treated as being generally applicable to events after the date of breach where the court decides to award damages in lieu on a negotiating basis as at the date of breach. After all, once the court has decided on a particular valuation date for assessing negotiating damages, consistency, fairness, and principle can be said to suggest that a judge should be careful before agreeing that a factor which existed at that date should be ignored, or that a factor which occurred after that date should be taken into account, as affecting the negotiating stance of the parties when deciding the figure at which they would arrive.

In my view, the proper analysis is as follows. Given that negotiating damages under the Act are meant to be compensatory, and are normally to be assessed or valued at the date of breach, principle and consistency indicate that post-valuation events are normally irrelevant; but, given the quasi-equitable nature of such damages, the judge may, where there are good reasons, direct a departure from the norm either by selecting a different valuation date or by directing that a specific post-valuation date event be taken into account.

In the present case I consider that the judge was fully entitled to conclude that the hypothetical negotiators should not proceed on the assumptions (a) that, as at the date of their negotiations, the lease was liable to forfeiture, and (b) that the tenant’s negotiating position was accordingly weakened by the fact that the lease might be forfeited.

If the landlords’ contention is correct, much time would be devoted to considering elaborate arguments as to the way in which each party to the hypothetical negotiations in October 2004 would put his case in relation to the possibility, and likely course, of forfeiture, waiver, and relief proceedings when negotiating the price the tenant would hope to extract from the landlords for agreeing to the relocation of the fire door. It seems disproportionate, almost absurd, to introduce so much technicality, artificiality and complexity into the negotiations when one knows perfectly well what the outcome of the actual forfeiture waiver and relief proceedings was, given the self-evidently small, if any, weight to be given to the risk of forfeiture.

The weakness of the argument in practical terms is reinforced by what the tenant actually did. As the judge pointed out, the tenant was in breach throughout the time of the negotiations in 2004, and yet it held out for a payment for agreeing the relocating of the fire door. The practical force of this point is emphasised by the fact that Mr Bartley- Jones argued, albeit in relation to the second issue before us, that, in those negotiations, the tenant had held out for an unreasonably high payment. (He rightly also pointed out that the valuation exercise involves hypothetical parties, but the attitude of the tenant before the valuation date is admissible, and, at any rate on the face of it, telling, evidence as to the likely attitude of the hypothetical tenant).

As to principle, I have already mentioned that the negotiating assessment exercise under the Act is not by any means necessarily subject to the sort of rigid rules which the landlords’ argument suggests. The selection of date of breach for the assessment of damages is not mandatory (any more than in common law for assessing damages for breach of contract). In this case, the tenant would have a powerful case for saying that the valuation date should be the 22 December, the date of judgment, particularly given the judge’s finding (referred to below) that the landlords had brought the interlocutory injunction on themselves, and that, until it was discharged on 22 December, the landlords could not actually continue, as it were, with their breach. To refuse the tenant a valuation on that date, 22 December, and fix it with a valuation as at 22 October, if it had the consequent disadvantage of having to face the argument which the landlords wish to raise, seems to me, at least strongly arguably, unfair as well as disproportionately inconvenient.

Further, there is no sensible or direct relevant relationship between the possible forfeiture and the attempts to relocate the fire door. It is not even as if any forfeiture proceedings at the time of the negotiations could have precluded the tenant from seeking to enforce the covenant for quiet enjoyment (see Peninsular Maritime Ltd v Padseal Ltd [1981] 2 EGLR 43).

In addition, the factor which the landlords wish to have taken into account is not merely extraneous to the issue of the subject of the hypothetical negotiations, but it relates to the specific parties, namely the actual landlords and the actual tenant. I should not be taken as suggesting that that would therefore disqualify the factor from being taken into account in a classic contractual or statutory valuation. However, the fact that it is not merely extraneous, but a factor which relates to the actual parties rather than representing an external feature, which would affect any hypothetical negotiating parties, renders it easier to justify its being excluded as a factor from the hypothetical negotiations. For instance, if the actual tenant had been abroad and out of contact at the valuation date, it could not sensibly be suggested that this would mean that the landlords could justify only a nominal payment, on the basis that the hypothetical tenant could not have negotiated more.

In all these circumstances, I consider the landlords cannot realistically contend that it was unreasonable or unfair that the court, particularly as it dealt with the forfeiture and relief proceedings at the same time as the claim for the injunction, should go on to decide that, if the damages for the permanent relocation of the fire door are to be assessed as at 22 October, they should be determined on the basis that the tenant had effectively seen off any risk of forfeiture of the lease.

Mr Bartley-Jones says that the judge did not give much in the way of reasons for his decisions on this point, although he did rely expressly on the unreality of the argument. But, as Mr Bartley-Jones fairly adds, the precise issue now raised in this court was scarcely in terms before the judge. In all the circumstances, bearing in mind that this was very much a secondary point that was shortly dealt with before the judge, and that the judge did give a reason, namely its unreality in practice, for not having it taken into account, I do not think that his judgment can be attacked on the grounds of lack of reasons.

I turn to the second point which divides the parties on this appeal, namely the refusal of the judge on 10 June 2005 to order an enquiry as to damages on the cross-undertaking offered by the tenant in order to obtain the interlocutory injunction on 22 October and to have it continued on 29 October 2004.

The judge’s reasons for this decision were as follows:

The judge went on to reject the contention that the tenant’s failures of procedure and disclosure at the time it obtained and continued the ex parte injunction in October 2004 assisted the landlords’ case that they should be able to enforce the cross-undertaking.

I turn first to consider the guidance from the cases and from principle as to the circumstances in which the court will not order an enquiry on the cross-undertaking which the claimant has given in return for the grant of an interlocutory injunction, even though no permanent injunction is granted at trial.

As a matter of principle, and, indeed, of general practice, I would certainly accept that, where a claimant has obtained an interlocutory injunction restraining the defendant from doing something until trial, and the court decides at trial that a permanent injunction should not be granted, the defendant can normally expect, virtually as of right, to have an enquiry as to the damages to which he is entitled pursuant to the cross-undertaking which the claimant will have been required to give as a condition of obtaining the interlocutory injunction. However, there plainly are exceptions to this general rule. In Hoffmann-Laroche v Secretary of State [1975] AC 295 at 361D, Lord Diplock said that the court “retains a discretion not to enforce the undertaking if …. it is inequitable to do so.”.

It is clear, however, that “special circumstances” are required before an enquiry can properly be refused. That expression was adopted, and its ambit explored, in the judgment of Peter Gibson LJ in Cheltenham and Gloucester Building Society –v- Ricketts [1993] 4 All ER 276 at 286h – 287g. He referred at 287e to Modern Transport Co Ltd v Duneric Steamship Co [1917] 1 KB 370, as a case where “Swinfen Eady LJ said that inequitable conduct by the defendant constituted special circumstances … but that was a case where he held that the plaintiffs were justified in applying for an interlocutory injunction”.

Another type of special case would be where the court is quite satisfied that no damages have been suffered, or where the court is satisfied that the damages have been suffered but should be summarily assessed by the court there and then. A further class of special case would be where the reason for the refusal of the grant of the permanent injunction at trial is based on reasoning pursuant to which the claimant would have been entitled to an injunction at the time of the interlocutory hearing, but has become disentitled to it as a result of events which occurred between the interlocutory hearing and trial. An obvious example would be where the injunction was based on a lease which was in force at the interlocutory hearing, but had for some reason (e.g. by effluxion of time) come to an end by the time of the trial.

The question for us on this second issue is whether the judge was entitled, as a matter of discretion, to refuse to order an enquiry as to damages on the tenant’s cross-undertaking for the reasons he gave. As Mr Stephen Eyre rightly emphasises on behalf of the tenant, it is important to bear in mind that the question is not whether the judge was right or wrong in refusing an inquiry: it is whether it was a proper exercise of his discretion to refuse an inquiry. Accordingly, unless Mr Bartley-Jones can show that the judge failed to take into account a relevant factor, took into account an irrelevant factor, went wrong in law or reached a conclusion which no reasonable judge could have reached, it is not open to an appellate court to interfere with it.

It is also right to bear in mind that, at least in relation to the reasons given in this case for not ordering an enquiry, the judge was in a significantly better position than we are to assess the strength of the points made to him and what one might loosely call the overall equity of the position. He had heard oral evidence from the parties and had studied the documents with some care in order to arrive at a number of findings of fact, inferences and judgments. It is only fair to acknowledge that on some occasions this can result in the judge not seeing the wood for the trees, and, at least to that extent, it can be said that an appellate court may sometimes have an advantage over the trial judge.

If one examines the four reasons given by the judge for refusing an enquiry, it seems to me that it cannot be denied that, subject to one possible point, each of them is correct as a matter of fact. The bricking up of the existing fire door was effected in order to bring matters to a head, and can fairly be characterised as provocative. It was also unlawful, and, despite the fact that the landlords apparently believed they were entitled to carry it out, it can be said, at least in objective terms, and certainly from the point of view of the tenant, to have been flagrantly unlawful. It also seems clear that the attitude of the landlords as to their rights in relation to the location of the fire door had considerably softened, and indeed had become pretty realistic, by the date of the trial, whereas it had been very aggressive and quite wrong as at the date the interlocutory injunction was obtained. Further, the landlords only avoided a perpetual injunction at trial because they submitted to terms to which they had refused to submit prior to trial, and, in particular, at the date the interlocutory injunction was obtained.

The only point of fact which is open to debate is whether the judge was right to decide at the interlocutory stage that the real cause of any loss suffered by the landlords was their “own attitude in refusing to accept that the tenant could choose the location of the new fire door and in refusing to acknowledge that the tenant could demand [negotiating] damages”. It seems to me that, if he did, and was entitled to, reach that conclusion, in the sense that the cause of any loss was, as matter of law, simply the landlords’ attitude, then the judge’s refusal to order an enquiry could be justified on that ground alone. That is because he would effectively be saying that the legal cause of any loss suffered by the landlords was their attitude and not the interlocutory injunction. If that were right, then this would have been a classic case of the trial judge deciding that he was satisfied that there would be no point in ordering an enquiry because no damages have been suffered as a result of the interlocutory injunction.

However, I do not think that is what the judge was really saying or entitled to say. In my view, his fourth reason really amounted to holding that, in the ultimate analysis, the landlords had brought the interlocutory injunction on themselves by adopting an attitude in negotiations which was wrong, and had been significantly resiled from from the date of the trial. I do not think that the judge would have been entitled to say that he was satisfied that no damages had been suffered as a result of the interlocutory injunction, on the basis of the evidence available. It would have been a classic issue for the tribunal hearing the inquiry. However, if Judge Norris was taking that view, I think he would have made it much clearer. As I have said, it would have been a wholly decisive point on its own.

Having decided that the judge’s four reasons for refusing an inquiry were all based on a correct, or at least a justifiable, perception of the facts, I turn to consider their relevance. In that connection, it appears to me that the four points overlap to some extent and can be encapsulated in the propositions that (a) the interlocutory injunction was justified in the sense that it prevented the landlords doing that which they were undoubtedly not entitled to do, (b) the landlords had brought the interlocutory injunction on themselves by their unreasonable and high-handed conduct, and (c) the landlords’ position in relation to their rights was very different and much less realistic at the time the interlocutory injunction was obtained when compared with the time that the court came to consider whether to grant a perpetual injunction at trial.

In my judgment, taking all these points together, at least in relation to the unusual, and frankly rather regrettable, facts of this case, the judge was entitled, in his discretion, to refuse to order an inquiry for the reasons he gave. This is a rather unusual case in the sense that the defendant is asking for an inquiry as to damages in relation to an interlocutory injunction which has been thoroughly vindicated in one sense, because there is no doubt that the disputed breach of covenant upon which it was based has been conclusively shown to have existed. Of itself, as Mr Bartley-Jones says, however, that cannot, as a matter of principle, be enough to justify the refusal of an inquiry. When considering whether to order an inquiry, the fundamental question is not whether the interlocutory injunction was based on a claimed right which has been vindicated at trial, but whether, in the view of the trial judge, the interlocutory injunction should have been granted, bearing in mind all the facts and matters known to the trial judge which, at least in many cases, could not have been known to the judge granting the interlocutory injunction. Nonetheless, it seems to me that, at least in this case, this first point can be said to be a necessary, but not a sufficient, condition to enable the tenant to avoid an inquiry.

In effect, it seems to me that in this case Judge Norris held, or at least came precious close to holding, that, bearing in mind the situation as it was on and immediately after 22 October 2004 when the existing fire door was bricked up by the landlords, the tenant’s application for an interlocutory injunction, and the grant of the interlocutory injunction, was actually justified. Clearly, if that was what the judge had actually held, then it would have been wrong to order an enquiry. However, even if, as I think is more likely, the judge was not actually saying that the grant of the interlocutory injunction was justified, he was saying that the landlords had brought the interlocutory injunction on themselves and that, bearing in mind all the circumstances, it would not be right to order an inquiry as to damages.

Subject at least to one point, I do not think it can be realistically argued that the judge was not entitled to take that view, and to refuse an enquiry for all the reasons he gave, particularly, as I have mentioned, bearing in mind the detailed appreciation he had of the facts and the benefit he had had of hearing evidence from the individuals involved. The only aspect which gives me pause for thought is whether the conduct of the tenant, which was undoubtedly unreasonable in many respects as well, can fairly be said, as it were, to defeat the reasons the judge gave for taking the relatively unusual step of refusing to order an inquiry. I have reached the conclusion that the tenant’s conduct does not justify over-ruling the judge on this point.

First, the judge was well aware of the tenant’s conduct, both in relation to the (mostly ill-tempered and often unreasonable) negotiations, and in relation to the obtaining of the interlocutory injunction. The weight to be given to the tenant’s conduct was a matter for the judge. Secondly, as Mr Eyre points out, the tenant had been ordered by the judge to pay the costs of the October hearings on an indemnity basis because of its regrettable failures. Just as negotiating damages should not have a punitive element, so should the cross-undertaking not be invoked, at least normally, for punitive purposes.

Thirdly, it can fairly be said that, in a sense, the tenant’s conduct has already been taken into account against him, and has rebounded to the landlords’ favour, when the judge had to consider whether or not to grant a permanent injunction. There appears to me to be an element of rough, but thoroughly reasonable, justice, on the facts of this case, in holding that the tenant’s conduct should be a significant reason for disentitling it to equitable relief in the form of an injunction and leaving it to its remedy in damages under the Act, notwithstanding the landlords’ unreasonable conduct, and going on to hold that the landlords’ conduct was a substantial reason for refusing to accord them the benefit of the quasi-equitable undertaking given to the court, notwithstanding the tenant’s unreasonable conduct.

If it had been argued below, and accepted by Judge Norris, that, had the tenant given proper disclosure, the interlocutory injunction would not have been granted on 22 October or continued on 29 October, my view would have been different. In such a case, it seems to me, the sort of points which persuaded the judge not to order an enquiry would be insufficient to meet the stark fact that the interlocutory injunction should not have been granted (or continued) and was only granted (or continued) owing to the tenant’s failure to comply with its obligation to give full and proper disclosure, and that the enquiry should accordingly proceed. However, that is not the present case.

On the third issue, it is conceded by the tenant that the judge was wrong to have awarded the landlords much of their costs on the standard basis. The tenant accepts the landlords’ contention that they should have their costs of the waiver, relief and forfeiture proceedings on the indemnity basis in the light of the covenant in the lease in this connection to which I have referred. As the landlords contend, when determining the issue of costs, the judge appears, uncharacteristically, to have overlooked the terms of the lease, and, even if it was open to him to do so there is no good reason, on the facts of the present case, to override the parties’ contractual agreement as to the basis of assessment of costs. Accordingly, on the third issue, I would, depending on what my Lords decide, either allow the appeal or dismiss it on terms agreed between the parties; and on the other two issues, I would dismiss this appeal.

LORD JUSTICE SCOTT BAKER: I agree.

LORD JUSTICE AULD: I also agree. There are three actions in respect of which these three appeals have been brought to court. The first, which I shall call the main action, which is number 2397, I agree with my Lord for the reasons that he has given, and on the two issues raised in that appeal, that the appeal should be dismissed. As to the other two actions, they are both matters which concern costs by way of appeal; they are numbers 2398 and 2400, and the order which I would favour, subject to any submission made by the Bar, is that the appeal should be allowed by consent of the parties.